The strength of the Lebanese Banking Sector

Lebanon is a country of wonders and miracles ranging from famous artists and singers like “Fayrouz” to brilliant poets and writers like Gibran khaleel Gibran and from magnificent nature to many scientists and inventors of Lebanese descent scattered in the world. Hence, one of the wonders of Lebanon is its firm and prosperous banking sector which contributes to turning Beirut into an important regional financial center and providing support and guarantee to the whole Lebanese economy.

The Lebanese banks and foreign banks (in Lebanon) combined together started up with total assets less than $ 3 billion in the beginning of the 90s of the 20th century to end up with total assets of $ 145 billion at the end of year 2012. All of these accomplishments have been achieved after coming up with continuous structural reforms in banking system, modernizing laws and adopting bank mergers and acquisitions. Nonetheless the institution of deposit insurance in Lebanon was established in 1967 helping Lebanon gain the soundness of banking system. The banking sector has contributed as well in the reconstruction process of Lebanon after 15 years of war ( from 1975 till 1990 ) because banks continuously supply both the public and private sector with some of their financial needs to further improve and develop.

Many factors help Lebanon to prosper and advance in commerce, financial trading and investments such as moderate climate, strategic location and millions of Lebanese expatriates worldwide, some of who send remittances to their relatives in their native country. In addition, the central bank has played a big role in the advancement of the banking sector as a whole in terms of advancement of technology utilized, banking infrastructure, regulations and legislative environment through forming banking governing bodies to keep Lebanon as an important financial center in the region. We discuss now how Lebanese banking sector has a refreshing influence on the Lebanese economy as a whole.
The strength and the flexibility of the banking system enabled Lebanon to reach financial stability. In details, the exchange rate of the Lebanese pound with respect to the US dollar was ( 900 LP= $1 ) in 1991, then became ( 1,800 LP =$ 1) in the year 1993 and so on till it became stable and fixed vis-à-vis the US dollar at rate 1,500 LP = $ 1 starting from 1998 till recent days. To stabilize the exchange rate of the Lebanese currency, it was necessary to sell treasury bonds in Lebanese Pound of 2 years maturity at an interest rate of 42 % in 1998 and then at 28 % in 1992. The interest rate on 2 years maturity treasury bills in Local currency continued to drop to 16 % in 1997 until it reached 5.84% in 2013, which means great accomplishment and increased credibility. The decline in interest rates and stability of the national currency led to improved balance of payments and diminished budget deficit. The above mentioned improvements increased the trust in the local currency (Lebanese Lira or Pound) and encouraged some people to shift their deposits from foreign currencies to the Lebanese pound, which still offers higher return. As a result, the total reserves of foreign hard currency (mostly US dollars) in the “Lebanese central bank” grew gradually to reach $ 17 billion in 2008 and upward to almost $ 37 billion in 2013. Moreover, inflation pushed downward from 120 % in 1992 to 9 % in 1996 and 3 % in 2013. In general, the central bank retains stability of interests on deposits and loans and the stability of prices in many situations through the good management of liquidity and money supply in the market.

Hence, the central bank supplies the Lebanese government with liquidity necessary to help ensure not only social stability but also the steadiness of both the monetary and fiscal policy as well. One way, the central bank with the cooperation of some banks and the ministry of finance, allows the Lebanese government to replace old treasury bonds with new ones having less cost ( lower interest rate ) and longer maturity period (longer period of time to be paid back) through a process called Swap. Thus, the country always meets its debt repayment on time; the thing that gives the country a better future economic outlook and more credibility which in turn caused the interest rates to diminish (expansionary policy) and cash flow or bank deposits to grow. By the way, the rising liquidity of banking sector and declining interest rates helped both the public and private sector get cheaper financing, which encouraged them to establish new projects, create more job opportunities and increase economic activity. Statistics show that loans to private sector grew 10 % in the 2012 because banks own large amount of liquidity in both Lebanese pounds and foreign currencies that are all under control and good management, so the loans to private sector totaled $ 45 billion ,surpassing for the first time, loans of public sector that amount $ 33 billion. By the way, the central bank of Lebanon subsidizes loans for various economic areas including construction activities, environmental (such as renewable energy), educational, industrial, agricultural, and research & development areas. Incentives are also given to people having innovative and creative business projects and ideas. Nonetheless, the banking sector as a whole with the collaboration with banking control committee attempt to reschedule or sometimes restructure (reprogram) loans given to many economic sectors especially touristic companies. In certain cases, they agree to convert the loans of these companies into shares to help companies persist and grow. Nonetheless, there are around 80 thousand loans supported by the central bank to encourage investment in real estate properties and other areas as well. According to statistics, the value of real estate transactions in Lebanon in the first half of the year 2012 reached $ 4 billion. If we go back to the 1990 s of the 20th century, the investment in Lebanon rose from $ 2.8 billion in 1992 to $ 5 billion in 1996. Meanwhile, the rising value of investments has contributed to the growth of gross domestic product value of Lebanon from $ 5.5 billion in 1992 to $ 13 billion in 1996 to progress further to $ 42 billion in 2012; this is great positive economic indication even before the extraction of the oil expected to be present in the eastern shore of the Mediterranean sea in the Lebanese territories. Hence, this economic growth reduced the percentage of the public debt compared to Gross domestic product (GDP) from 180 % in 2006 to 150 % in 2010 and down to 137 % in 2012. By the way, another point of strength is that the operating banks (including the central bank) and financial institutions in Lebanon finances 70 % of the offered loans to the public sector, so the public debt is mostly internal.

Thus, the banking sector and the financial situation were both stabilized and developed through the help and efforts made by the previous prime minister Rafik El Hariri, who led the way to make the conferences of Paris I and Paris II allowing the international community to support Lebanon with financial grants and cheaper loans, all of which improved the credibility of the Lebanese financial situation. The previous prime-minister had good relationships with many countries across the world and good management of economy that gave Lebanon access to financial assistance. Besides, the governor of the central bank called “Riad Salami “ , who received many world prizes and awards after 20 years of persistent success in the management and leadership of the Lebanese banking sector. Nevertheless, Riad Salami aided Lebanon to be ranked in the 12th position globally concerning the firmness and strength of the banking system. Lebanon used to be called “ the Switzerland of the Middle East “ due to great banking services offered and the law of banking secrecy that has been implemented since 1956.

The banking system has been built on sound and robust financial engineering and monetary policy in which Riad Salami (Governor of the central bank) had an important role also. Besides, continuous advancement and reforms have been achieved in banking and financial laws and legislation plus the development of banking infrastructure and technology. The development and strength of the banks in Lebanon are due to several reasons, some of which are:

First: Specifying a minimum percentage of required reserve ratios based on total deposits of the banks.

Second: Organizing the process of issuing treasury bonds and treasury bills whether in foreign currencies or national currency to meet the financial needs of the government and ensure a better management of public debt at the same time.

Third: Encouraging banks to strengthen its capital base and diversify its assets to guarantee a minimum level of solvency to catch up with the requirements of Basel – 3 in the year 2015. Nowadays, banks have more than enough solvencies of 12 % which is more than the minimum 8 % required in Basel – 2; having adequate solvency gives more international trust in the banking sector and assists the banks to grow, expand, thrive and open new branches inside Lebanon and outside as well. In this manner, they diversify their assets and business activities both inside Lebanon and abroad in the 5 inhabited continents of the world. It is well known generally in business world that diversification of investments constitutes more balance in different kinds of assets, expansion of business activities, more safety, and increase in resiliency ( immunity ), because it is better not to put all investments in one place. For instance, Bank Audi initiated recently some branches in Turkey after it had already opened some branches in Europe, Middle East and Africa. Another example, Bank of Beirut bought an Australian Bank and named it “Bank of Sydney”. In conclusion, the overall improvement is clear when statistics show that the portion of assets of Lebanese banks outside Lebanon rose from 32.4 % of total assets of Lebanese banks in December 2012 to 38.4 % in June 2013.

Fourth: The governor of the central bank avoided the global financial crisis that started in 2008. Instead, there was high percentage of economic growth in Lebanon in 2008 and 2009 because of conservative and careful but wise financial policy and strategically controlled investment. Thus, very rare were risky investments taken or speculation used by banks, so most of their investments were safe and of good quality. Meanwhile, despite the fact that the central bank subsidizes and encourages loans for housing, industry, education, and environment (as a detailed example, the central bank has subsidized around $ 4 billion for housing loans recently), it manages not to permit the amount of all loans combined together to exceed a certain percentage of total bank deposits, so that banks operating would preserve a minimum percentage of necessary liquidity. Besides, loans are only granted after the file, business expectations, and capability of the customer to pay back in return are well evaluated and assessed. At the same time, the customer must give either a cash guarantee or property mortgage and in some cases he or she is required to have at least one person as a guarantor. In accordance with legislation, the value of a loan can’t go beyond 70 or 80 % of the real value of the mortgage property. If the loan is large, the customer has to buy some kind of insurance. Nevertheless, as we mentioned previously, that in certain cases, there are ways to facilitate or help the customers settle or repay their loans through rescheduling or restructuring loans (for longer period) or even sometimes converting the bonds or loans into stocks or shares.

In conclusion, the flexibility and good management is shown since the percentage of doubtful debt to be collected in 2012 did not exceed 3.5 % down from 12.2 % in 2006. Meanwhile, the provisions allocated for such debt covered up to 75 % of these doubtful debts in 2012 rising up from 66 % in 2006 as an average.

Fifth: Merger of banks or even the acquisition of the weak banks by the strong banks under the control, supervision and approval of the central bank of Lebanon. For instance, Bank of Beirut has bought a smaller bank called “Bank of Beirut and Riyadh”, so bank of Beirut has grown larger and more powerful becoming one of the top 10 banks in Lebanon. A great example of merger is between bank of Audi and the financial institution of Saradar in 2004. The resources and technological experience of both Audi and Saradar were both combined together to form a holding company called “Audi – Saradar” group, that is the second largest banking group in Lebanon and one of the biggest 500 banks in the world. In the years starting from 1993 and till 2014 , the
number of banks has fallen by
50 % because of merging banks especially small ones into bigger and stronger banks.

Sixth: Implementation of international laws in the process of transparency and fighting money laundering; the Lebanese banks or foreign banks ask about the source of any large amount of money that a customer acquires. Add to that there is cooperation and exchange of information about taxes with the governments, central banks and ministries of finance of some countries like France and USA for example. Some of the employee staff in the banks are being trained by the help of experts of international accounting companies for the application of the newly issued American law called “FATCA” concerning taxes on all properties and wealth ( whether inside or outside USA) owned by American citizens.

Seventh: The Lebanese banks are characterized by providing diversity of updated and modern services. As an example, there is an electric card called “possess in your homeland “that permits and encourages the Lebanese expatriates to buy and possess a property in Lebanon. There is also a card called “ Lebanese “ which transforms the expenses charged through the use of this card into units or minutes of mobile calls for free to all users. Besides, a special kind of electronic payment cards are produced to offer their users discounts upon visiting some chains of restaurants and shopping centers or residence of some hotels in Lebanon. In addition, “Master Card Cedar Miles” gives its owner (upon every use) accumulation of miles to travel for free through certain airlines like MEA, Air France and others. Moreover, modern services like wireless payment and electronic payment through the mobile and internet (e-payment) are established. For instance, Bank Audi has issued recently a web site on the internet called e-mall, where a virtual mall on the web site for some companies to show or present their goods and products that could be sold electronically through visa and American Express for example. The goods sold are protected and transported from the commercial companies to the customers all over the world by postal corporations (that bank Audi contracted with). A good point that commerce through the internet seems to be growing and is expected to have a promising future. Other services are internet banking that gives a plenty of various banking services through internet. Private banking is advanced because it offers great opportunities and private services to individuals like diversified investments in the stocks of several companies, treasury bonds, mutual funds, trading in financial securities and others. Moreover, the Lebanese banking legislation and law also permits Islamic banking.

Eighth: Gold represents coverage for local currency. Despite the small area of Lebanon, it owns 287 tons of gold reserves or nearly 10 million ounce of gold. Lebanon is ranked 19 in the world in terms of the size of gold reserve by the International Monetary Fund (IMF) sources.

Ninth: Economic Freedom and permission to transfer funds to and from Lebanon. Moreover, there is no restriction on conversion of the national currency into foreign currency or vice versa. The law protects foreign capital and foreign deposits inside the country where there is only a little tax on capital profits and interests gained on deposits. Consequently, many Lebanese expatriates deposit their money in Lebanon to benefit from the high returns on deposits in the Lebanese pound that offers 7 % interest especially if the deposit account is big enough.

Tenth: The profits of banks are generally on steady growth as statistics show. Profits in 2012 increased despite what is happening (Arab Spring) in Syria, the neighboring country. The importance of the Lebanese banks is that it employs 21 thousand people, 72% of whom have university education at the end of 2012 and encouraged to stay and work in Lebanon. Add to the last mentioned facts, the indirect job opportunities that banks could create through lending and spending money and so on.

Eleventh: Banking and financial institutions constitute a vital and important part of the real economy. The proof is the large role played by central banks and other banks in countries through the use of certain financial instruments. For example, interest rate cuts, buying treasury bonds and in some cases printing money when needed to revive the economy especially in developed nations like USA, Japan and Britain. Not only developed nations use financial instruments, but also rising or developing nations like Turkey has recently raised interest rate to keep the exchange rate of the Turkish pound stable. Another example is China that is now taking action to make gradual reform of the banking sector in terms of some liberalization of the national currency exchange rate and interest rates. Specifically, there is now in China removing the ceiling for interest rates on loans to encourage financial institutions to give more loans. Moreover, new laws in China demand insurance on some loans. Besides, more Steps to improve assessment of credibility to grant loans are taken. Nevertheless, China has felt the need to open up its economy for more private banks to operate rather than restrict the Chinese banking sector just for public or governmental banks only. The recently stated reforms and restructure in the financial and banking system is necessary and vital to maintain a sustainable and balanced growth. By the way, we note that the larger the size of the economy or gross domestic product gets, the more enormous and abundant the financial institutions and the banking sector grow and so the opposite is true. To illustrate, we can notice the level of income (or GDP per capita) in Switzerland and Luxembourg is one of the highest in the world because of the very powerful and successful banking sectors that they possess.

In return to the case of Lebanon, the growth of the Lebanese banking industry contributes to the development of the Lebanese economy generally in various ways and at most times. Moreover, it encourages partnerships between the public sector and private sectors in order to develop infrastructure, boost economic growth and increase job opportunities. There, are many reasons that strengthen and protect the Lebanese banking sector which has great potential and faith in the future of Lebanon.

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